Monday, April 29, 2013

Of Human Bondage



An increasingly unhinged Australian mainstream media, with a few honourable exceptions, has been revving up the scary-o-meter in recent days about this country facing a future of debt, deficits and public penury for as far as the eye can see.
 
“A decade of deficits spells a bleak future for Australians,” was the headline on the increasingly tabloid ABC television news, warning of a crisis bigger than the one where Bates went to jail in Downton Abbey.  I spluttered over my warmed up risotto (my lovely wife was out at the movies) and quickly checked my Bloomberg terminal.

Nope. No crisis. In fact, the bond market had rallied on the day of the announcement of a $12 billion worsening in the budget bottom line.  Yields had fallen. In bond market speak, that means prices had risen. In other words, more people wanted to buy our government bonds.  No fears, then, of a supply glut.

For those not familiar with public financing, the government meets the gap between revenues and spending by issuing bonds, a sort of publicly traded IOU. As Australia is one of only eight nations in the world rated the rolled gold ‘AAA’ by all three major ratings agencies, this makes our bonds highly sought after.

In other words, the big funds in London and New York look at Australia and see a virtual South Seas Switzerland – strong public finances, solid growth, low unemployment, low inflation, good yields and politically stable.

Clearly, then, these poor deluded souls wasting their billions are not listening to the ABC News or reading the front pages of The AFR (‘Budget Hole Hits $12bln). Perhaps, they were looking instead at Rupert’s US financial daily, that lefty rag The Wall Street Journal, which last year described the Australia Government’s ‘AAA’ debt one of the few safe haven investments left in the developed world.

You see, this is what happens when you let political journalists loose on an economics story.  For these people, bonds have something to do with the money they will forfeit for spilling red wine on the carpet of their 80s rented apartments in Belconnen. Economic literacy is not the gallery’s strong point. Easier just to reheat the talking points supplied them by the political short-order chefs.

Which is why the routine with budget stories is to wheel out Chris Richardson of Deloitte Access Economics, position him Moses-like on a grassy knoll overlooking federal parliament, and get him to dip into his bulging knapsack of mangled metaphors about various dire states of in-hockedness.

Some perspective, then. The shortfall in the budget is about 1% of GDP. What does that mean? Imagine you’re a two-income household earning about $200,000 a year. You’ve done the household budget. It’s not good. You forgot to include Jasmine’s school trip, which is going to cost $2,000. That’s 1% of your household GDP. Well, that’s the position Australia is in. Cue the violin sonatas.

And what about THE DEBT?  Another analogy: Your household income is $200,000. Your mortgage is $20,000. Yes, $20,000. You are no worse off than Australia the economy. Are you worried?

Now some more perspective. Australia has an unemployment rate of 5.4%.  In the US, the economy leading the world out of recession, unemployment is 7.7%, in our commodity cousin Canada 7.0%, in the European Union about 11%, in Spain 27%. You can see these numbers on the OECD’s website here.

Another fact: Before the GFC, Spain was an exemplar of fiscal rectitude. It was so parsimonious it would have had Chris Richardson writhing in think tank ecstasy. In 2007, Spain posted a budget surplus, the second largest in the Eurozone. Clearly, then, we can’t blame budget recklessness for Spain’s position now.

Since the financial crisis, Australia has gone from 15th to 12th largest economy in the world. In that time, 900,000 new jobs have been created. This is a period when in much of the developed world, millions of jobs have been lost and millions of lives destroyed.

Now think about what would have happened to our budget position if the government here had taken the austerity route – that is had worn the hair shirt recommended by the mean-eyed tailors of the media. Tens of thousands of people would have been thrown out of work. More unemployed means more social spending. Fewer employed means lower consumer spending.

What do you think happens to the budget in that scenario? A hint: Take today’s “black hole” and dig much, much deeper. Then throw into that hole the bodies and dreams of the lives destroyed by unemployment, failed businesses, faltering health and education forgone.

So forget the cute, faked up, political narratives. These are the facts. If there is a budget black hole that we should be scared about, the financial markets are not telling us so. In fact, they are sending the opposite message. In any case, the hole is not significant in the scheme of things. And finally, the damage – not just fiscal, but human – would have been far, far greater if we had listened to the punishers and straighteners now lecturing us from their privileged positions.

None of this is intended to deny we have budget challenges. But don't believe those who say it is due to "out-of-control" spending. As a proportion of our overall growing economy, our public spending has remained relatively constant. What's happened is we got a big, temporary pay rise in the early 2000s via the commodity boom and then we made permanent changes to the budget (largely via tax cuts and middle class welfare) that mean when revenues fall, as we are seeing now, it has a bigger effect on the bottom line.

Be aware, also, that the high-flying Australian dollar - which is defying the usual sell signals of falling commodity prices and narrowing interest rate margins - is acting on a brake on much of the trade-exposed parts of the economy. And that's affecting tax revenues as well.  As we saw, the Australian dollar is so high partly because we are such a model of fiscal virtue and good governance. People overseas want to lend to us. And that means the government is borrowing at an extremely competitive rate. It's a good credit risk.

The important point for the average person is a budget surplus is not an end in itself. If you buy the austerity doctrine, you end up like the poor souls in Spain. You can't eat budget surpluses. Good economic policy is about ensuring we grow our common wealth in a sustainable way. And that means keeping people in work, creating the conditions for business to flourish and ensuring a level of equity and justice.

You won’t read this in the newspapers, because it doesn’t suit the story they want to sell you. It requires an understanding of economics and how financial markets work. Most of all, it requires a sense of perspective, which is in short supply in much of our political journalism these days. Shame.

22 comments:

  1. Presumably some of the attendees at the conference in your last post were political journos. I have a suggestion for them. Get a whole lot better at your damn job.

    ReplyDelete
  2. Isn't 1% of $200,000 $2000?

    Spot on with the rest.

    Love, Adsy Wadsy.

    ReplyDelete
  3. Given the facts you have set out about the economy, why has a senior member of the Government not gone along to a meeting with the Mark Scott (Managing Director, ABC) and asked him to explain why Chris Uhlmann (ABC 7.30 program) is allowed to constantly present a false and deceptive account of the Government's financial management.

    Does anyone in the Labor party (apart from Gai Brockman) watch the tripe constantly served up Uhlmann? Are they too busy to offer an effective rebuttal.

    ReplyDelete
    Replies
    1. well said the media really need looking at in this country which is what the gov't tried to do. You can include the shock jocks as well Jones and Hadley.

      Delete
  4. Bravo! Succinctly and eloquently explained, and *gasp* backed up with facts!

    Now to see if this article can get some clean air...

    (Yes, I call it an article as it is a damn sight better than the pap you read elsewhere by so-called professionals).

    ReplyDelete
  5. Notus, Uhlmann is doing his job, which is focusing on the political noise around these issues. My point is the political noise doesn't tell you much, except what the entrenched positions of Team A and Team B are advancing.

    The problem with so much news around economics in Australia is it is reported through a Canberra focus, which really doesn't tell you much. And that's why I'm saying you have to take it out of the political noise machine and look coolly at the facts.

    ReplyDelete
    Replies
    1. Kipling once famously wrote: "... when all about you are losing their heads and blaming it on you ..." Sadly, a prime minister who sticks to her guns (at least in terms of focussing on what she believes is best for the country) but who won't stoop to the level of her opponents or who fails to gain the support of the mainstream media, has been judged as naive and useless, regardless of her record. The outcome will be that, no matter how well Gillard kept her head, it was those who had lost theirs who eventually prevailed. History may well show that Australia's first female prime minister was very effective but that focus and determination was no match for nastiness, ignorance and populism.

      Delete
    2. Ray Hadley, Alan Jones, Andrew Bolt, Mike Smith and Steve Lewis (good mate of Uhlmann) are all just doing their jobs as well but they are not being paid out of my taxes.

      Delete
    3. My solution is not to watch Uhlmann. I recommend it.

      Delete
    4. not sure whether "doing their job" is enough when the job you hold has so much influence on what people think and do. I know elderly people who listen to these loosely termed commentators and believe everything they say.

      Delete
    5. 7:30 is always on my 'watch list' except when Uhlmann is on.

      Delete
  6. The fact is that a budget surplus is theft by stealth without supplying services.

    ReplyDelete
  7. Good post. Thanks for the perspective.

    ReplyDelete
  8. Thanks Mr D. I am a regular reader and confess that I need rows of coloured beads to assist counting. I have, however, a keen awareness that The Economy is politcal play dough. I understand that the media likes big scary stories of doom and destruction but surely this time Julia Gillard helped out. I am not being critical. I don't think she had any choice but to front the cameras to convey constructive concern about the deficit. If she had talked up the economy she would have been shouted down and accused of lying.

    ReplyDelete
  9. Wonderful piece. More. Please.

    ReplyDelete
  10. Thank you for this article, which assesses the situation accurately. Perhaps, as someone wryly suggested to me, the ABC cannot get anyone else besides some of these commentators like Chris Richardson.

    Perhaps I should not admit it, but I voted Liberal at the last Victorian State election, but I did not vote for the federal Coalition last time and have been unable to understand why so many people did. I look at the whole of the Coalition front bench and regard them as unintelligent and nasty rabble. Even Turnbull has lost any semblance of the respect I once held for him.

    I love the ABC, but I've stopped reading the ABC's online site at present and often switch off their current affairs programmes, because the lack of intelligent analysis gets too much to endure. I've gravitated to the alternative online sites and learnt a lot. I have watched some of the ABC's “Insiders” program and suspect that the ABC have Piers Akerman, Niki Savva and Gerard Henderson as commentators in order to get a reaction from their audience. Those three never criticise the Opposition no matter what and offer ludicrous propaganda in response to any criticism made of the Opposition by other commentators on the programme. Other journalists, like Chris Uhlmann, appear to have a deep cynicism about democracy and the Parliament itself and I agree that the best idea is to laugh, tune out or switch off.

    At least your article and the other articles linked to here made me realise that there is still intelligent life on earth.

    ReplyDelete
  11. I've been working overseas (SE Asia) since last September and I cannot tell you how much I enjoy not watching the ABC News and Current Affairs any more. Sure I watch Australia Network news but that has a more regional focus and not so besotted with Aust politics. Not missing 7.30 Report either. I have to admit I lacked the self-discipline to stay away from it and The Drum for long when I was living in Australia - in the hope that perhaps maybe one day the ABC would get back on an even keel. Now I don't have a choice - and it's wonderful. One of the great failings of the Govt since 2007 has been not replacing Scott. Howard never did anything balanced in politics - he picked Scott for a reason, same as he stacked the ABC board with Albrechtsen, Windschuttle et al. For reasons I cannot fathom, Gillard seems to place some sort of premium in not playing dirty - something which has never worried Abbott.

    ReplyDelete
  12. Nice analogies. Pity they are neatly hiding the reality.
    "Another analogy: Your household income is $200,000. Your mortgage is $20,000. Yes, $20,000."

    First of all, the government income isn't the GDP, it is a little over 20% of GDP. Net government debt (not gross) is over 10% of GDP. The income you speak of is currently also overcommitted and the commitments are very difficult to wind back.

    So your analogy is false, and your article reveals a total lack of understanding of the subject matter you are attempting to comment on.

    A closer analogy would be (ignoring personal taxation to simplify):
    You earn $200,000, but you have ongoing yearly commitments of $220,000, and this has been true for the last 5 years. You don't earn enough to cover your expenses, so you've extended your mortgage and maxed out your credit cards.
    When you look at your total assets, even though your house is worth $500,000 your mortgage and credit card debt add up to $600,000 so you actually have negative assets of half your income. Even though you received a pay increase of 7% last year, you managed to increase your expenses by even more and you you don't think you have a problem.

    ReplyDelete
    Replies
    1. What utter nonsense.

      A country is not a household. It does not have a "mortgage". It's a sovereign entity! Countries don't go bankrupt.

      Yhey can be railroaded into policies that suit a narrow economic interest (the ten percent of Australians that earn more than $100K for example). But history shows us that disputes between sovereign nations are best solved by bullets than bankers.
      Harry is the sort of silly man that will be arguing classical economic theory with hungry unemployed tradies as they string him up from a lamp-post so they can rifle his fridge and pantry! lol

      Delete
    2. Thanks for all that detail. It's always to hard to have a debate with someone so able to provide such detailed and meticulous analysis. You truly are awesome. To be honest, I was expecting a content free response, some name calling and attempts to characterise me as heartless and indifferent to people's difficulties. Luckily you rose above that.

      Just a few small corrections to your response:
      "A country is not a household. It does not have a "mortgage"."
      That's true, however you should try to read the blog post first, there you will discover that the creator of the mortgage analysis wasn't me. I just improved it to match reality.

      "Countries don't go bankrupt."
      Perhaps you should look up the term "Sovereign default", assuming you get past the first few complex words, you'll even find some nice examples.

      I'm sure that being totally wrong in your assumptions won't sway you at all, it clearly hasn't till now.

      By the way, that tendency to delight in fanciful images of mob violence and war is quite becoming of you. The left must be so proud to have such an intellect and moral beacon on their side. You can resume your giggling now.

      Delete